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Refinancing

Discover the hidden costs of interest in mortgage payments and learn how refinancing can save money and change the loan term. Explore the fees involved, consider cash-out refinancing, and understand the break-even point. Determine if refinancing is worthwhile by comparing rates and analyzing the potential savings. Evaluate your loan fees, credit status, equity, and more to make an informed decision for your financial goals.

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Refinancing

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  1. Refinancing WHPE

  2. Goals of Chapter • To illustrate the hidden costs that interest adds to a mortgage payment. • To explain how refinancing can save homeowners money. • To explain some of the fees associated with refinancing.

  3. To Refinance or Not to Refinance • The homeowner can save money • Change the term or payout period of your mortgage • The break-even point • Cash-out refinance • The general rule is: If the new loan results in at least a 1 percent, and preferably a 2 percent decrease in your interest rate, then refinancing may be worth considering.

  4. Before Refinancing Determine • Possible loan fees • Current “loan conditions” (Check your current set of loan documents and mortgage partners for refinancing approval requirements.) • Any prepayment penalties for the new loan • Your current credit status • How much is left to refinance (Check your current mortgage statement.) • Your current equity or the market value of your home.

  5. Refinancing to Save Money Using an online mortgage calculator, enter: • The amount of your loan • The term (30-year note) • The interest rate Calculate the payment for each interest rate. The lower rate saves $134.21/mo.

  6. Refinancing to Change the Term of Your Mortgage • Use a mortgage calculator to compare current loan to other scenarios. • In this example, refinancing at the lower interest rate of 6 percent for a 20 year loan results in a lower monthly payment. • Lower interest rate and shorter time result in reducing interest paid over loan’s life: $49,996.44

  7. The Break-Even Point • Break-Even Point: time it will take to recoup the cash you used to refinance your loan. (List of typical fees in chart.) • Using the previous loan data, expenses = $5620. • Break-Even Point: Total fees ($5,620) divided by monthly savings ($61.57) results in 7 years and 6 months to earn back the cash spent on fees. Note: Considering the interest saved by reducing the term of the loan to 20 years ($49,996.44), this a very good deal.

  8. Cash-out Refinance • You may be able to refinance your mortgage into a lower rate, and take out some cash in equity at that time. • This type of “cash-out refinance” adds to the total debt and increases the time and cost of repaying the loan. • If your credit score is low, lenders will consider you a higher credit risk and charge you a higher interest rate.

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